The agricultural futures market in low development countries: a policy to respond to the volatility of prices?

This work discusses the possibility, or rather the effectiveness, of the use of agricultural futures as a means of hedging to minimize exposure to price risk. In particular, the analysis refers to "low-development countries" (LDCs), countries in which agricultural products play a prominent role and in which the process of market liberalization, which took place following the removal of state intervention, is determining an increasing exposure to price volatility. Knight's uncertainty is said to make both producers and speculators more risk averse, hence more conservative. In particular, when the futures price is well above the expected spot price (adjusted for the Knightian uncertainty), the optimal position for the producer is a total hedge of his production, while the optimal position for the speculator consists in not operating at all in the market. We can limit ourselves to observing that if a single producer and a single speculator operate in the market, the equilibria that can be reached are three: of complete exchange, of non-exchange and of partial exchange. The possibility of obtaining one of the three equilibria depends on the degree of risk aversion and the degree of Knightian uncertainty possessed by each of the two different subjects. Access to the capital market is a crucial element for the development of agriculture, both in the start-up phase and in the improvement phase. The search for new capital and new tools to facilitate market access requires a high degree of trust on the part of financial market operators, a trust that is often compromised by the low profitability of loans and the high risk associated with them. The exposure to risk of agricultural activities limits, in fact, the interest of traditional finance, reducing the availability of capital to the few remaining resources within the sector itself after the flight to more attractive alternative uses. Hence the need to introduce new financial and insurance techniques and services, such as to guarantee the agricultural sector the capital necessary for growth and, at the same time, attractive return opportunities for investors. Specifically, it is stated that one of the most profitable paths to follow in this regard is implementation within all EU member states of particular agricultural reforms that introduce risk management techniques in agriculture already successfully implemented by the U.S.A.1